NVDA - Nvidia: Q4 Earnings Expected To Fall 60%

Summary

• NVIDIA is set to release its earnings tomorrow.
• Analysts expect NVDA to bring in $0.47 in earnings per share, down 60% from a year before.
• My own calculations indicate a 66% earnings decline.
• GPUs are widely used in many products.
• However, NVIDIA is a fairly "niche" semi name that makes a lot of money selling to gamers and crypto miners. Both gaming and crypto were out of favor in Q4.

NVIDIA ( NVDA ) is set to release its earnings tomorrow, February 22. A lot is at stake in this release. In its previous quarterly release, NVIDIA missed analyst estimates and guided for a weak fourth quarter. If the company beats estimates this time around, then its stock has a chance of climbing out of its current slump.

Beating estimates will be a tall order for NVIDIA. The company faces a number of headwinds heading into earnings, including weak RTX 4080 sales, a declining videogame industry, and an ailing cryptocurrency market. NVIDIA makes a lot of its money off gaming PCs and crypto mining; its bread and butter clients suffering will of course lead to its own sales taking a hit.

It’s pretty much a foregone conclusion that NVIDIA’s sales and earnings will decline in the fourth quarter. The company guided for severe declines in both, so any positive growth in either metric is extremely unlikely. The question is whether NVDA’s fundamentals will decline by as much as analysts expect. The stock market is a forward looking discounting mechanism that values assets based on their future expected cash flows. If a stock beats expectations, it should theoretically rise even if the year over year change in fundamentals is negative. In this article I’ll take a look at what analysts are expecting from NVIDIA’s fourth quarter earnings, and what impact it could have on the stock price.

My Earnings Calculation For NVIDIA

In an effort to determine NVIDIA’s likely Q4 earnings, I put together an estimate based on management’s guidance , which it released in its previous quarterly report. Here’s what NVIDIA's management is expecting:

• $6 million in revenue.

• A 63.2% gross margin.

• $2.56 billion in operating expenses.

• $40 million in other comprehensive income (“OCI”).

• A 9% tax rate.

Based on the numbers above, I calculate that NVIDIA will earn $1.157 billion in fourth quarter net income. Here’s how I break that down:

• A 63.2% gross margin on $6 billion is $3.792 billion in gross profit.

• Subtract $2.56 billion in operating expenses and you get to $1.232 billion in EBIT.

• Add $40 million in OCI and you’re up to $1.272 billion in pre-tax income.

• A 9% tax on $1.272 billion is $114 million.

• This yields $1.157 billion in net income.

NVIDIA earned $3 billion in the fourth quarter of 2021, so we’re looking at a 61.4% decline in earnings here. However, this is just going off of NVIDIA’s guidance, which was published in a November 16 earnings release. Possibly, things changed in the time between that date and the end of the quarter. So, let’s take a look at the things that might have changed.

Buybacks

So far, my calculations argue for a slightly larger decline in NVIDIA’s earnings than what analysts expect. I worked out $1.157 billion in GAAP net income, down 61.4%. Analysts are expecting $0.47 in GAAP EPS, down 60%. These figures are pretty close but not identical.

One possible cause for analysts expecting a smaller decline than I’ve calculated is buybacks. My net income projection translates to $0.46 in EPS, using last quarter’s share count . A few billion dollars' worth of buybacks would push EPS above $0.47. So, we need to know whether NVIDIA did indeed do buybacks in the fourth quarter.

This is pretty difficult to determine. We know that NVIDIA authorized $15 billion worth of buybacks through to the end of 2023. Since then, NVDA has done $7.19 billion worth of repurchases: $3.75 billion last quarter , and $3.44 billion in the quarter before that . So, we’ve got $7.81 billion worth of authorized buybacks still remaining. If half that amount of stock ($3.9 billion worth) were repurchased, then GAAP EPS would beat analysts’ forecasts. Most likely, NVIDIA will do some kind of buyback, as it has authorized one already. We don’t know how big it will be, but we know it’s likely to happen. Given this, it’s actually quite possible that NVIDIA will beat analyst estimates when its earnings come out tomorrow. But if there’s weakness on the revenue front, then the release could miss expectations. So, let’s look at the factors likely to have impacted NVIDIA’s revenue in the fourth quarter.

Gaming

NVIDIA is best known as a supplier of graphics cards to the PC gaming industry. Its business has diversified beyond this niche, but it’s still a big part of the company’s overall picture. So, how did gaming do in Q4?

We know that Activision Blizzard ( ATVI ) delivered positive revenue growth and beat revenue estimates in Q4. That’s a good sign. However, ATVI sells games across both PCs and consoles, and only PC sales are relevant to NVIDIA: console manufacturers use AMD ( AMD ) graphics cards.

According to various sources, PC game sales declined in 2022. PC Games Insider reported that EU sales fell 7.1% , while The Verge reported that U.S. sales fell 5.1% . The Verge also reported that AMD’s GPU sales fell 7% in the fourth quarter. NVIDIA’s $6 billion revenue guidance represents a 21% decline from the year-ago quarter. That’s worse than the decline in the PC gaming market, so we need to look elsewhere in NVIDIA’s business for indications as to how its Q4 revenue will turn out.

Crypto

One place to look is crypto mining. In many ways, the crypto market was in the gutter in Q4. Bitcoin’s price was down, sustainable energy usage was down , and miners were selling their positions rather than holding them. The overall picture looks to have been a bad one. However, a Crypto Slate article claimed that “more miners joined the network” in Q4. If that’s the case, then there might have actually been an increase in crypto GPUs purchased from NVIDIA.

Data Center

One thing we know for sure is that data center revenue declined a lot last quarter. We can infer that from the fact that AMD’s “client processor” (i.e. server or data center) revenue declined 51%. These trends tend to be very consistent across companies, so we’d expect NVIDIA’s data center numbers to look like AMD’s.

On a more positive note, AI chatbots like OpenAI’s ChatGPT run tens of thousands of NVIDIA GPUs, and that number will only increase as AI ramps up. There is some potential for NVIDIA to make money off AI in the coming year. However, the ChatGPT phenomenon hit fairly late in the fourth quarter, so we wouldn’t expect it to make a big impact on the upcoming release.

To summarize, we’ve got PC GPU sales down 7% across the industry, data center sales down 51% at AMD, and too little information to draw a conclusion about crypto mining. Taken together, these numbers are consistent with NVIDIA’s forecast of a 21% revenue decline. So, I’m expecting NVIDIA’s revenue to be in-line with estimates.

Will NVDA's Q4 Earnings Beat Expectations?

Having looked at NVIDIA’s revenue picture, it’s time to return to the larger question about EPS. Basically, I expect revenue to be in line with estimates. I’m also expecting $1.157 billion in Q4 net income. If we assume that NVIDIA does another $3 billion buyback in Q4, then we get to $0.47 in earnings per share–in-line with analyst estimates. Here’s how the math on that works:

• NVDA shares were at an average level of about $140 in Q4.

• $3 billion buys you 21,428,571 NVIDIA shares at $140.

• This reduces shares outstanding from 2.499 billion to 2.477 billion.

• $1.157 billion divided by 2.477 billion is approximately $0.47–exactly what analysts are expecting.

So, my forecast for NVIDIA’s upcoming earnings release is identical to the analyst consensus on both the top and bottom lines. I am expecting what the markets are expecting.

The Bottom Line

Looking at all relevant factors, I expect NVIDIA’s revenue to be in line with estimates, and its earnings to be either in line or a slight miss. If NVIDIA does another $3 billion buyback, then EPS will hit the analyst consensus. If it does no buyback, then it will miss by about $0.01. All of this assumes, of course, that NVIDIA’s guidance was accurate. If the guidance was way off, then the numbers could be totally different from what I’m estimating here. However, I see no indication that the revenue figure should be off.

What should investors take from this information?

If anything, they should see it as a sign that not much interesting will happen after tomorrow’s release. My estimates suggest that the stock won’t move a whole lot after earnings. One thing that investors might want to watch out for is a disappointing buyback. If NVIDIA buys back no stock, then EPS will probably miss the $0.47 analyst consensus by $0.01. That’s not a very wide miss but the disappointment in there being no buyback could trigger some selling. Trading based on such sentiment has little to do with fundamentals, though. For this reason, I consider NVIDIA stock a clear ‘hold,’ neither a buy nor a sell.

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